Friday, March 29, 2013

What is a valid signal?

As I do not restrict myself to a small basket of futures, or even one country's stock market constituents, I can afford to be choosy when it comes to selecting stocks to trade. I know from experience what set-ups work for me and my system. Of course, not all of them work out, and is one of the reasons you should always apply good risk control. I look for those set ups that show the same characteristics, over and over again.

In my method, not all stocks making new highs (or lows) are giving a valid signal. There are a few 'tricks of the trade' from observing and trading over the last few years that are incorporated into my basic rules. So what do I look for? Well, the clues are all contained within the charts I use, and when you know what to look for, it surprising how easy it is to pick up. When I'm training or mentoring I'm always pleased at how easy it is to convey what I look for, as well as how quickly people new to the system can identify a valid set up from going through a few examples. It isn't rocket science. As Ed Seykota would say, it's like having an "A-ha!" moment, when you can see these setups. All I am doing is using my knowledge and past experience to identify those stocks with the best chance of success. The scans I use do part of it for me, the rest is down to the visual interpretation, but again this is relatively simple.

I know there would be plenty of people out there who, should they know my system rules, would probably rubbish them. They would probably start out by saying something like "Is that it?", closely followed by saying that I'd need to do this and that, probably add this particular indicator, and what about volume???? But that's the beauty of using such a system - simplicity is key. Everything else is not important.

There is also one unarguable truth. For you to make a profit on a long trade, your exit price needs to be that a higher level than your entry price. There could be any number of reasons why this would happen, but unless price moves in the direction you intend, then you can't make a profit. It therefore shouldn't need saying that, should price go in the opposite direction, you will make a loss. So there is no need to listen to Bloomberg, or read up on your brokers' notes, or study a balance sheet or a grain report, or anyone else's opinion. Price is all a trend follower needs to know.

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